Jayne-Anne Gadhia told the banking commission that when employed at Royal Bank of Scotland she wanted to pull PPI
Banks could have withdrawn payment protection insurance from sale many years ago, the boss of Virgin Money said on Tuesday, but did not because they were worried about their profitability and their share prices.
Hitting out against the “cartel” of the high street banking industry, Jayne-Anne Gadhia told MPs and peers on the banking standards commission that when she worked for Royal Bank of Scotland she had discussed with a “senior person” that PPI should be withdrawn. She left RBS at the end of 2006 after running the mortgage business to join Virgin Money which bought the branches of the nationalised Northern Rock at the start of the year.
But RBS did not step back from sales of PPI, which was sold with loans and is now costing the industry more than £12bn for mis-selling, because it did not want to be first to withdraw.
She said that “nobody was prepared to be the first mover” because the share price and profitability would be hit. RBS withdrew PPI from sale in 2009 shortly after Stephen Hester was appointed as chief executive following the £45bn taxpayer bailout. Hester repeated his warning about the potential hazards of forcing banks to erect a ring fence between their high street banks and investment banks.
He told a separate session of the committee that “when I look at the things that brought RBS to its knees they don’t readily lie” inside or outside the ring fence.
In its submission to the committee, RBS said: “We remain concerned that ringfencing may unintentionally amplify some of the financial stability problems the government’s banking reforms are intended to address. For example, ringfencing could exacerbate the implicit government guarantee for certain banks or increase the risk of financial contagion”.
Appearing with António Horta-Osório from Lloyds Banking Group and Peter Sands of Standard Chartered, Hester argued that banks should be allowed to sell derivatives to customers from inside the ringfenced bank. “I don’t think there is a measurable benefit to excluding derivatives in a hard-line way,” Hester said.
The bankers also discussed the calls by Sir John Vickers’ Independent Commission on Banking to introduce a so-called leverage ratio of 4% – essentially 25 times leverage – as a way to reduce the risks being taken. The government has instead opted for the more relaxed 3% ratio which allows 33 times leverage. Horta-Osório warned that such ratios could restrict lending while Hester said the ratio should be seen “as a backstop, not a primary control of risk”. Michael Cohrs, the former banker who sits on the Bank of England’s financial policy committee, backed the 4% ratio.
The committee is engaged in pre-legislative scrutiny of the Vickers reforms which require the ring fence to be implemented by 2019.
RBS’s submission also calls for banks to be given longer than the current deadline of 2025 to split up their pension funds between the ringfenced and non-ringfenced bank.
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